22. Georgia Company uses the allowance method of accounting for bad debts. Georg

Question

22. Georgia Company uses the allowance method of accounting for bad debts. Georgia estimates that uncollectibles for the year will be 4% of accounts receivable. Total accounts receivable for the year are $100,000. The prior-period balance of the Allowance for Doubtful Accounts account is $0. Georgia determines it cannot collect $600 from Gwinnett a credit customer. What is the journal entry to record the uncollectible amount on the books of Georgia?

A. Debit Bad Debt Expense $600; Credit Accounts Receivable $600.

B. Debit Bad Debt Expense $400; Credit Accounts Receivable $400.

C. Debit Allowance for Doubtful Accounts $600; Credit Accounts Receivable $600.

D. Debit Bad Debt Expense $4,000; Credit Allowance for Doubtful Accounts $4,000.

I know the answer is C. But can you explain why? Thank you

Explanation / Answer

The Accounting is done as per the Allowance method. Under Allowance Method following entries are passed:

1. At the time of creating Allowance for Doubtful Debts
Debit: Bad Debt Expense
Credit: Allowance for Doubtful Debts

2. At the time of writing off uncollectible accounts
Debit: Allowance for the Doubtful Debts
Credit: Accounts Receivable

Since the company is using Allowance method and has to made an entry for writing off the uncollectible amounts the entry will be:
Debit: Allowance for the Doubtful Debts
Credit: Accounts Receivable. Thus, Option C.

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